RetireJapan

1) Fixed or variable loan rate
I'm wondering if anyone who has a crystal ball would speculate whether a fixed or variable rate would be better. Some banks give you the option to choose.

2) Penalty for early payment
I'm wondering if in Japan, there is a penalty for early payment / payoff of a loan. There has been such a principle in the US.

Hi Joy

My bank allows extra payments free of charge, but it will be one of the conditions of the loan (I think some banks do charge a fee). Recommend choosing a bank that doesn't

As for the fixed/floating rate mortgage, my thinking is that it depends on the amount. For example, when I got the mortgage for my manshon it was only 9.9 million, so I went with a floating rate at 0.5%. I don't believe interest rates are going to go up in the short- to medium-term, and if they do we can pay the mortgage off without too much trouble.

On the other hand, when we were looking at borrowing 32 million my thinking was to go with a fixed rate around 1%, as this would guarantee we wouldn't face problems. We can afford the payments at 1%, but they might be more of a problem at 2%, 3%, or 4%. The saving of 0.4% (floating rate has gone up slightly since last year) isn't worth the risk of future interest rate rises for a larger amount.

Basically you have to think about what works for you. Make sure you shop around though, as mortgages are somewhat complicated, and there are several different types.

Howdi, in my book the length of your loan is a major factor in deciding between the 2 flavors.

We took out a 20 year loan with the first 10 year fixed because I mistakenly believed (at the time) that inflation was coming. It wasn't and I lost some money in doing so. However we all make the call when the time comes, sometimes its right and other times its not. It was an error on my part but fortunately it wasn't such an expensive one... My fault was in believing anything the prime minister had to say

The 2nd 10 years defaulted to a lower floating rate.

After year 5 we went back to the bank and said, we want a lower rate. What can you do for us ?

We were implying that we could take our loan elsewhere. Like many of us here in Japan, we are lucky enough to be doing fairly well in life with a positive cash flow and a good life. The bank knows we are good customers, after all they use our accounts to make more money right ? My mentor always said "business is business and love is bullshit".

They lowered the loan rate and thanked us for our business. So if you don't ask, you won't get it.

We ended up going with a lower rate for the remaining 5 years on the fixed rate, with the defaulting floating numbers after that. Noting that before that occurs we will once again be in their offices suggesting another "adjustment" of the loan is necessary.

Yes its a lot of extra work to go through the mortgage process. Indeed whenever someone checks your credit rating in North America it takes a minor hit. I don't know how the Japanese handle that sort of transaction.

Yet to have the ammunition of an alternative bank when you go into the original loan provider is like sitting in first class.

An early payment penalty sounds like the bank trying to foist costs upon the customer. I heard the same thing when signing the contract, yet after getting the lower rate 5 years into it, the saving more than pay for any "penalty" they would impose. Of course before I paid any penalty I would move my loan to a different bank making sure to renegotiate in the process of doing so.

"Gee it would be difficult for me to change my loan, but if you insist on charging me a penalty for early payment I have no other choice but to consider taking my business elsewhere. Please think about your decision"

I'd go for a fixed-rate loan if for no other reason than rates have a heck of a lot room to go higher over the course of the loan than they do to go lower. We already have negative interest rates in Japan, 10yr JGBs are at 0.04%...mortgages simply don't have room to go much lower. So even if interest rates do go a bit lower, it will be a fairly inexpensive 'mistake', and if rates stay flat or go higher, you're indifferent / better off.

I got a loan from SMBC last year, and they allowed me to do 50% of the loan fixed and 50% of the loan variable

There is the potential for higher interest rates even if Kuroda and team just admit defeat and stop pinning long term interest rates down.

For any lengthy loan I’d go with a fixed rate, and think of it as buying insurance against interest rate risk. You may not make money from it but you could save a lot in the worst case scenario.

What would be a reasonable fluctuation of interest rates/year? Would +/-0.4 be a reasonable median, excluding any financial crisis or overheating? Trying to calculate for a tempered "worst case scenario" .

crew wrote: ↑Fri Jun 01, 2018 8:41 am What would be a reasonable fluctuation of interest rates/year? Would +/-0.4 be a reasonable median, excluding any financial crisis or overheating? Trying to calculate for a tempered "worst case scenario" .

I believe that regardless of what actual rates do, banks can only increase the interest a certain amount every couple of years.

Probably worth asking your bank about this.